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Building A ‘Total Portfolio’ Approach From A Clean Slate | Exclusive Q&A With Shawn Wischmeier, CIO Of Cargill Philanthropies - Part I

by trusted insight posted 4years ago 2998 views

Shawn Wischmeier joined Margaret A. Cargill Philanthropies in May 2012 as the foundation’s first chief investment officer. Previously he was the CIO at the North Carolina Retirement Systems and CIO at the Indiana Public Employees’ Retirement Fund. Prior to that he was a senior analyst in global treasury at Eli Lilly. Wischmeier holds an MBA from Northwestern University and a B.S. in chemical engineering from the Rose-Hulman Institute of Technology. He currently serves on the board of directors at Camp Fire Minnesota and sits on the Investment Advisory Council for the Minnesota State Board of Investment.

Wischmeier’s interview with Trusted Insight is organized in two parts. In part one of the interview, he discusses how he radically changed the investment team at Cargill Philanthropies and built an investment portfolio from almost a clean slate.

Wischmeier was recently named on Trusted Insight’s Top 30 Foundation Chief Investment Officers. He graciously spoke with us on Apr. 25, 2017. 

Trusted Insight: You’ve seen the investing industry from a number of angles, a corporate treasury, a pension fund and now a foundation. How have those different types of asset allocating roles shaped your investment philosophy? 

Shawn Wischmeier: Investing across the different pools of capital is not as different as some people would like to believe. The objectives of what the money is used for -- ultimately the liabilities -- are different in each pool, and that affects the investment decisions and how you structure the portfolio. However, picking managers and investments or finding good risk-adjusted returns is more of a function of asset size, not necessarily whether it's coming from a pension plan, foundation or other pool of assets, with the caveat that FOIA or disclosure laws can make it a lot harder for public pensions to accomplish their goals and get into the right investments.

In terms of my personal philosophy, I think they've all been additive. It's beneficial that I've been able to build networks in a corporate pension, two public pensions and now the endowment and foundation world. The ability to cut across all those different areas allows me to have a strong network of people I can call on and ask for input and advice. I think that's immensely beneficial. It also has made me appreciate how wonderful our governance is here at Margaret A. Cargill Philanthropies. I was fortunate in the public plan world to work in states where I had good leaders and good governance; however, I can see now how truly strong governance without the influence of outside constituents can lead to a better structured portfolio and stronger risk-adjusted returns.

Trusted Insight: Can you discuss the process of building out an investment office? What did you start with?  

Shawn Wischmeier: Prior to my arrival in early 2012, our investments were managed by internal executives with the help of consultants. Back then we had a much smaller pool of liquid capital.  I came in as the first CIO, and we sized up the number of people in the investment office and built it out over the last five years.

In terms of the most important aspect, I don't want to come across as being cliché, but it's all about the people and the governance structure under which the team will operate. That understanding has been shaped by my prior experiences as well. You quickly learn that you need the right people in the right roles, motivated to do the right thing. For the first year that I was here, there was an extreme focus on creating the right organizational structure, and recruiting the right people with the right backgrounds to fill available roles. So organizational and governance structure is first and foremost. I probably spent half my time in the first year focused on human resource activities. 

After that, you must set clear policy. We had to completely rewrite the investment policy statements for each entity to outline roles and responsibilities under our new organizational structure. We chose to establish a statement of beliefs to help understand things like: Will we be making direct private equity commitments, invest in buyout funds, or both? Is there a desire to use intermediaries, such as consultants?  It was redefining the parameters of our investment program. These parameters included both the number and type of people, but also the policy constraints under which the team is to operate and the internal processes that guide how we operate from day to day.

So, we spent an inordinate amount of time writing policy and getting everybody on the same page, and that has paid huge dividends over the years. Starting up new investment offices or rebuilding existing offices has been a large focus in my current and prior roles.

Trusted Insight: You decided to structure your team around a portfolio risk profile, as opposed to a public/private style. What are the pros and cons of that structure?

Shawn Wischmeier: We have an equity team that manages long-only equity, equity-based hedge funds and private equity. We have a credit team that manages fixed income, credit-based hedge funds and private credit. Then we have a real assets team, which includes real estate, commodities, infrastructure and other private real assets. We have a risk management and asset allocation team that's focused on the entire portfolio, systems, tools and approaches to asset allocation. We've recently added a fifth group that focuses on trading and investment operations. 

One benefit of this structure is flexibility. For example, the equity team is not forced to fill an allocation to hedge funds or private equity. They have the flexibility to identify the exposure that they want and then find the right structure for the investment. Liquidity terms may be different depending on the type of investment opportunity. There are liquidity constraints on each portfolio, but they're at the total portfolio level, not by asset class.

Another benefit is that we have multiple people that have experience with hedge funds, closed-end or and open-ended, public or liquid structures. So it gives us better ability to move people from one team to another. For example, if someone understands private-style funds like buyout and venture, then it's not as big of a leap to move over and do private credit.

A negative side of the approach is that many external managers may have investment products that cut across different asset classes as we have them defined. This can lead to confusion related to the correct contact on our team to evaluate investment opportunities. Additionally, we may have multiple internal teams having common relationships with the same manager.

I do believe that the benefits outweigh the negatives.

Trusted Insight: You had a relatively clean slate when building out the investment portfolio. What are some of the challenges?

Shawn Wischmeier: In general, clean slates are very advantageous. Especially clean slates where you're not overcommitted to closed-end funds. However, a clean slate wasn't as beneficial during the last five years as one might have expected. You would like to have liquidity when liquidity is valuable. Because we've been in this eight-plus year equity bull market run, liquidity has not been that important. Illiquid assets have generally returned in excess of public markets during this period; therefore, the lack of these higher returning assets in the portfolio has been a drag on returns relative to peers with more mature portfolios.

So, having that liquidity has not been as useful over the last five years as what it could have been. We're forced to buy into markets that are increasing in value from year to year. We didn't have the benefit of having private equity and these other illiquid assets that were getting hugely marked-up valuations relative to their public counterparts.

To learn more about foundation investing, click here to view the complete list of Top 30 Foundation Chief Investment Officers. 

You can view our full catalogue of interviews with institutional investors here.